Book Review | The Mystery of Capital

Samarth Bharadwaj

 

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To uncover and understand the Mystery of Capital, Hernando De Soto through his books tries to explain to his readers why Capitalism has not been triumphant in the developing and post-communist countries and how the West has successfully generated capital in its territories. The book makes a persuasive read because of the simplicity of the revolutionary idea that it proposes which, according to the author, if sincerely applied, can lead to the creation of capital in the developing and post-communist countries. The writing style of the book is lucid and is deeply engaging for a reader interested in understanding the development paradigm of the third world and the post-communist countries. It first delves deep into the understanding of the term ‘Capital’ and then identifies the reasons for the success of capital in the west.

The book has a clear thesis which can be held onto by the reader throughout the book. The central idea of the book is a powerful one, a first of its kind: what creates capital in the West? The answer is formal property. It is the formal property systems which begin to process the assets into capital i.e. the formal property is the place where capital is born. The author himself is aware of the challenges this idea would face and wants the readers to comprehend this as an idea that is neither too complex nor too simple.

Capital, therefore, is born by representing in writing, in a title, a security, a contract, and in other such records. Hence, the ownership of the assets gets a formal registration and becomes a part of the formal legal property system. These ‘property representations enable the people to think about the assets not only through a physical acquaintance but also through the description of their latent economic and social qualities’ (p. 50). This process has made it easy for the people in the West to identify the different assets with great convenience as they do not have to physically visit a property to estimate its economic and social value. All the information related to the assets is available under one unified property system, enhancing the production of capital. But how could the simple formal recognition of property be the solution for the development of Third World and former communist nations? Continuing along the same line, De Soto argues that easy and universal access to the formal property would allow people to generate productive capital.

According to him, the West is able to successfully generate capital because the formal property structures are in place in these countries, whereas their absence in the developing and post-communist regions is the reason why capital is not being generated in these countries. He blames this on the extra-legal sectors which act as an obstacle to the creation of capital.

The solution envisioned by the book is to formalise the extra-legal sectors in the countryside and have a legal property system that incorporates the property claims of those in the extra-legal sector, giving the unrecognised assets a formal title or representation which would make them fungible and fit for capital production. This idea presented in the book is crisp and is full of promise if implemented with an ardent political will, making the idea both innovative and unique.

The author has backed his study with data collected during fieldwork in the developing and post-communist countries. The data is reliable and a rigorous methodology has been applied to collect the data as is evident from the following instance. To understand the life of a migrant in developing countries facing bureaucratic hurdles, the author set up a small and legal garment shop on the outskirts of Lima, Peru. It was found that to start a small business, it took six hours daily to get the registration processed, and finally after 289 days, the registration gets approved.

To engage the reader with perplexing concepts like Capitalism, formal property structures, the creation of capital and other technical concepts, the author relies on the usage of analogies, supplementing the simplicity of the idea being propounded. For instance using the energy analogy, De Soto takes the example of a lake on a mountain top, which has the potential energy to generate electricity only if somehow the water from the lake can be flown downwards by the engineer and converted into kinetic energy. The hydroelectric plant below the lake is where the conversion of potential energy into kinetic energy takes place, producing electricity. The assets owned by the people harbour the potential to create capital via additional production but to harness this potential energy a process is needed. To convert the asset into capital, formal property system acts as the hydroelectric plant which can transform the assets into capital. The assets reach the formal property system via a simplified legal system which ropes in all the sections of a society and the property they own.

According to the author at present, there are only twenty nations therein which capital is generated and the one thing they all have in common with each other is a formal property system where capital creation takes place. But these systems did not exist from time immemorial ranking instead they are a recent development in the Western and other developed nations. To understand this better De Soto traces the history of the United States back to the American Revolution when the thirteen colonies were under British rule.

The challenging American experience of the colonial and post-colonial authorities with the squatter settlements is exactly what the developing and post-communist countries have undergone till date. These legal authorities are engaged in a constant tussle with the extra-legal settlements, as they are seen as a hindrance to the economic progress of a nation. This notion of the legal tussle holds significance even fifteen years after it was propounded. This proves that even the mightiest producer of capital had to go through what currently the developing and former communist countries are going through.

This historical reference of the author to the social contracts in American history gives the readers a necessary break from the property and capitalist jargons. While exploring the historical aspects of the formal property system in America, the author has also mentioned the violent transformation which the United States had to pass through before it finally structured a formal property system for its citizens, inclusive of the earlier extra-legal properties. While unfolding this idea, De Soto talks about how to recognise the extra-legal sector in the first place, as the assets they own are mere physical representations and are not representative of their legal characteristics.

Though the book has managed to give an innovative idea to the solution of the mystery of capital, the author has not stopped at merely discussing the solution but has also given an elaborate list of steps, which if followed can remedy the problem of absence of a formal property structure and  capital creation in a society (p. 168-169).

While trying to understand the role of property in capital creation, the author prescribes that if capital has to be created, it can only be done if there is a formal property structure in place. This over-simplification of the process of capital creation can hit the reader and cultivate a sense of suspicion in their mind whilst they try to grasp this notion throughout the book.

The ideas presented in the book make the readers examine capitalism from a new lens, where the author is not merely talking about the positive or negative aspects of capitalism or criticising the communist regime. The author believes capitalism is in crisis outside the Western world, not because international globalisation is failing, but because the developing and post-communist countries have not been able to globalise the capital within their own territories. While the majority of the population outside the bell jar view capitalism as a private club discriminating against them in every way possible, the author believes the system of capitalism is in itself not flawed, only its promoters are arrogant and drunk on their victory over communism, and they are yet to understand that their macroeconomics reforms are not enough.

The book can be suggested for both the Capitalists and the Marxists. The author himself claims that he is not a die-hard capitalist and does not view capitalism as a credo. Yet while promoting the idea of reviving the capitalist systems in the developing nations because ‘capitalism is the only game in town’, he talks about the ghost of Marx which haunts us in this era, where proletariat uprising can happen any moment if the bell jar is not lifted and masses are not given access to the legal property systems. This ideological balance of the author is clear and stable throughout the book.

 Finally, the innovative and revolutionary ideas propounded by Hernando De Soto, are eye catching and one can stumble upon their simplicity whilst understanding the role of property systems in the development process in developing and post-communist countries. Yet the sole reliance of the author on just one aspect of capital creation gives a narrow appeal to the narrative of capitalism. It can be qualified as an essential condition for the development process but it cannot be placed as a pre-condition to the development paradigm.

(Samarth Bharadwaj is a graduate student of Master of Public Policy in the National Law School of India University. He can be reached at samarthb@nls.ac.in)

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One thought on “Book Review | The Mystery of Capital”

  1. This is an interesting book review. The book title as well as the narrative provided here make clear attempt to attract reader’s attention. Some of the aspects revealed in this review, such as the author’s action-based research or references to physics and history, make for an engaging read.
    It would have been great, if this review also provided author’s (reviewer’s) own reflections on the book. There are instances where this review seems swayed by the book. For example, it is said that the idea of formal property in this book is ‘a first of its kind’. Also, perhaps in an attempt to seduce readers, it assumes a fallacious binary and says, ‘the book can be suggested for both the Capitalists and the Marxists’. Such instances actually question the quality and reliability of this review.
    It will be nice to read, if the reviewer expands some ideas he has touched upon at the end: why he calls the work as ‘narrow appeal’ to the narrative or what he sees as distinction between ‘essential condition’ and ‘precondition’ to the development paradigm.

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